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Vitru Limited (VTRU) Q2 2021 Earnings Call Transcript

By Motley Fool Transcribing – Aug 25, 2021 at 10:00PM

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VTRU earnings call for the period ending June 30, 2021.

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Vitru Limited (VTRU 2.43%)
Q2 2021 Earnings Call
Aug 25, 2021, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good evening, ladies and gentlemen, and welcome to Vitru's second-quarter 2021 earnings conference call. All participants are in a listen-only mode. Later on, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call is being recorded and will be available on Vitru's IR website.

Now I would like to introduce the host for today's conference call, Mr. Carlos Freitas, Vitru's CFO. You may begin.

Carlos Freitas -- Chief Financial and Investors Relations Officer

Thank you, operator, and good afternoon, everyone. Thanks for joining us. It's a real pleasure to be here with you for the release of our second-quarter '21 numbers. I hope you all are doing well and healthy.

Here with me, I have Pedro Graca, the CEO of Vitru, as you know; Maria Carolina Goncalves, the head of IR; and also [Inaudible] from our investor relations team. A slide presentation will be part of today's webcast, which is also available in our Investor Relations website at I trust you all have this presentation in front of you. And before we begin, I'd like just to make note that as detailed in Slide 2 and 3 of this presentation, safe harbor is in effect for this call.

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So now I invite you to go to Page 5 of the presentation. Here, we have a glimpse of the highlights of the second quarter of the year. And as not a surprise to you all, the first highlight was if the announcement that we made yesterday regarding the agreement for business combination with Unicesumar, which as we discussed, is a leading institution for high-quality education here in Brazil and also with a fabulous presence in health-related courses, include medicine. We are very happy and very proud for having reached this agreement with a family that controls -- the families that controlled -- controlling it, Unicesumar.

This transaction is still subject to antitrust authorization, which we expect to have by the beginning of next year. Second highlight is that we have new quarters. We got the approval for the last quarters in digital education. This was granted.

We have the five grades granted by the Ministry of Education. We're still not allowed to offer these courses. There's still some pending steps in this process. But once it is done, we're going to be allowed to offer more than 22,000 seats of Law in Digital Education.

We're going to be a game-changer, a revolution in the industry. And also, we also are [Technical difficulty]

Questions & Answers:


Ladies and gentlemen, currently, we are experiencing a technical difficulty. Please wait one moment.

Carlos Freitas -- Chief Financial and Investors Relations Officer

Hello, everybody. Sorry for the interruption. We were cut. So I was presenting the second bullet in Slide No.

5 of the presentation that I trust you all have in front of you. As I was saying before the cut, we got authorization -- or in fact, we've got a Grade 5 from Ministry of Education to offer Law courses and we got the authorization to offer now Nursing courses in digital education as well, which we already started to offer two weeks ago, in fact. This is also a major push for digital education in Brazil. Nursing is a leading course today in on-campus.

And by the way, our nursing digital course is already the second largest we have today in the current in-taking cycle, and that with only two weeks of intake. So there's a huge demand. We are taking high-quality education to all the places in Brazil where there's no brick-and-mortar education available, but with all the quality that you know that we offer, so this is also an important game-changing movement in the sector. Third bullet.

We reached nearly 364,000 students in digital education, with important growth in the southeast, which I will show later. Net revenue in our core digital education segment grew 35% in the second quarter of this year. And the consolidated net revenue grew around 30%, so very sound numbers. Regarding adjusted EBITDA, it increased 22% in the quarter and 29% almost in the first semester of this year.

Later on, I'll explain the difference between the first -- the second-quarter and the first-semester numbers. And our EBITDA margin in the first half of this year was now 30%, compared to 29% one year before. And cash flow generation from operations increasing 33%, reaching 76 million reals in the first half of this year, with an important cash conversion of around 84%. Now on Page 6, some highlights of Unicesumar, just for those who could not participate in the call we had yesterday morning.

So Unicesumar is a leading institution with net revenue of around 730 million reals in 2020 and more than 250 million reals last year as well; with a 35% margin; with 760 hums, more than the number of hubs that we have as well; and in total, more than -- in fact, 314,000 digital education students, including graduation and undergraduation; 17,000 on-campus and an important CAGR of around 50% in the last three or four years. On top of that, it is a very relevant player in medicine. It is one of the -- it is among the top 10% of medical courses in the educational standards and a high demand ratio of 11-to-1 applicants per seat in two sites. They're in Maringa and now in Corumba, and with the best overall indicators of quality.

As you can see here on the right, they have a CI -- an institutional concept of five such as ourselves. They have the IGC, this course index of four for 10 years, which is quite unique in the industry. They have IDD of 3.75%. IDD, as you remember, is that indicator that measures the evolution of the students throughout the course comparing the grades of the ENEM with the grade of the [Inaudible].

That's the value-added provided by the institution is measured by the IDD. And IDD of Unicesumar is around 40% above the one of the market and even above the one that we achieved the highest average IDD in digital locations among all listed companies in Brazil. On Page 7, some reminders about the transaction details. So after the analysis of the two authorities, hopefully beginning of next year, Vitru Brazil will own 100% of the total share capital of Cesumar, which is the company that owns Unicesumar, to be paid around 60% at closing after, 18% after one year after closing and 19% in Vitru's shares to be issued at closing, for a total equity value of 3.15 billion reals, enterprise value of 3.2 billion reals, which means an implied multiple of EV EBITDA, considering the last 12 months as of now June, which is now available, of around 11.8.

And also from a PE perspective, it is a very accretive transaction. The last 12 months net results, net profit of Unicesumar is actually above 200 million reals. So it is a transaction of around 16 times PE. If we look at the last 12 months numbers, if you look at the prospective number, the future numbers for '21 or '22, etc., it is even lower and a transaction with a lot of important synergies, which is on chart here on the right, not only cost synergies but also commercial synergies.

We have already estimated that the synergies regarding costs and expenses will amount to between 115 million to 130 million reals per year by 2024. So two years from now, synergies of around 115 million or -- to 130 million reals per year, which if we debate on value taking inflation out, it is between 100 million to 110 million reals per year. So a very sizable amount of synergies with a total present value of synergies in cost and expenses of more than 1 billion reals. And on top of that, we have very potential commercial -- very important potential commercial synergies, which are here on the right, the first two bullets.

The faster expansion with the potential use of both brands in cities with only today one brand. Today, there are 600 cities in Brazil with only a hub from either Unicesumar or UNIASSELVI. So the potential to cross -- for cross-selling here is huge. And also, with the increase of offering of courses that we, for example, have here in UNIASSELVI, we have today around 150 undergraduate courses in digital education, while Unicesumar has a bit more than 60 courses.

So also, here an important potential to offer both these courses in both brands. And after the transaction, the family that today control Unicesumar will hold around 23.6% of Vitru, the three private equity funds around 56.6%, and free float of around 20%. On Page 8, another important highlight. As I mentioned, the new courses we have in digital undergraduate courses.

First, nursing is already being offered, as I said. And today, around 6% of all our intake is in nursing. It is the second-largest intake -- second-largest course in our intake for this current cycle. And again, this started three weeks ago.

So there is a huge potential demand for nursing courses. So this is going to be a driver for growth here going forward. And also, Law and Psychology degree as well are one step behind. We have already been granted the grade from the Ministry of Education, but there's still a final process to offer the courses of Law and Psychology, which we hope that we can offer this quite soon.

And here in the pie chart on the bottom-right, you can see the size and the relevance of Nurses, Law, and Psychology in the current on-campus enrollment. So the three together represent around 27%, more than one-fourth, of all students in on-campus courses. Now on Page 9, we have some more numbers about our growth in our digital education courses. We reached 308,000 students, a growth of 30% quarter on quarter, in line with the CAGR we had in the last years, and reaching a total number of around 371,000 students, of which 98% in digital education.

As you know, as we discussed already in the last call, the intake cycle for this year -- for the first semester of this year was quite a bit different than what we had last year. This year, on the bar chart in the bottom that there was a certain delay in the intaking for the first semester of this year, which has some impacts that I'll show you later in the average ticket. But the intake cycle was strong. Again, this is already presented in the past.

We had an increase of 32% in the intake or undergraduation courses this year. And by the way, the current intake cycle is also very strong. We are still far from the end of intake cycle. As you know, we have this modular academic approach, through which we have incoming students, basically, 12 years and -- so far from that, and what we have seen so far is that on a comparable basis, intake is very strong again.

On Page 10, the expansion throughout Brazil, comparing June over June. You see here that we have growth throughout Brazil, throughout the country. In our core market, the regional market in the South of Brazil, a 17% growth, even being income here and throughout Brazil in the center, North, Northeast, strong growth and particularly in the Southeast, we are doubling the number of students year over year over year. And this is not only pushed by the maturation of our courses, but also by the expansion -- sorry, maturation of our hubs, but also from the expansion of our hubs.

You see here on the right that we have increased about 31% the number of hubs in the last 12 months. On Page 11, some more color about the Southeast expansion. As I said, we are doubling the number of students year over year. So we had 16,000 two years ago.

One year ago -- sorry, in December of '19, 16,000. In December of '20, 30,000. Now in June of this year, 43,000. So we are virtually doubling year over year.

So this is a region that we are still shy. And now with the business combination with Unicesumar, we are going to accelerate the penetration in the Southeast. Just as a reminder, the portfolio of hubs of UNIASSELVI and Unicesumar are very complemental. For example, the Unicesumar has more than 130 hubs in the state of Sao Paulo.

So it is very complementary portfolio of hubs if we sum the two institutions. On Page 12, the maturation of our current hubs. This is a very known chart that I like a lot. And this is just to highlight that we keep maturing the hubs that we opened in the last year.

The base of the -- the major hubs are mature. They are stable. They are more or less around 100 -- between 100,000 and 110,000 students, which is normal. They are virtually in full capacity, as you know, and all the expansion hubs growing as planned throughout the country.

And today, we have a maturation index. If we sum all the expansion hubs of around 34%, which means a potential to increase three folds the number of people in the hubs. On Page 13, some more financial numbers. Here, I'd like to highlight the increase in net revenue of 35%, as I said, in this quarter and 30% -- 28% in the first half of this year.

So very strong numbers in our core business and also in the consolidated numbers. And here on the right, what I said, this was already presented as well in the first quarter of this year, the delay in the intaking cycle in the first semester of this year, basically because of the ENEM delay. As you know, ENEM is an important trigger for enrollment in Brazil, and then was delayed from early January to end of March. So the whole sector had the effect of a more back-ended intaking cycle, which means that the newcomers that joined us throughout the first intaking cycle, they left on the table less revenues than last year.

Basically, that's the reason for this slight reduction of 3% in the average ticket. On Page 14, some consolidated figures. As I said before, 30% increase in net revenue in the quarter, 35% gross profit increase, and adjusted EBITDA increasing as well and reaching 96.5% EBITDA in the first six months of this year. Some more details on that on Page 15.

We have a growth -- strong growth in digital education, as I said. But also, in continuing education, a very strong growth here as well of more than 21% this quarter. And on-campus undergraduate virtually flat. This is declining over time, as you know, but this is more than compensated by the growth in digital education.

So on Page 16, some more details about continuing education and on-campus. Containing education keeps growing as fast as undergraduation. And on-campus, as I said, it is declining a little bit year after year. And we have as well here -- important just to remind you all that we have virtually no dependence on CI.

So CI was, in the first -- in second quarter of this year, only 0.7 million reals, so virtually zero, and this [Inaudible] going forward. On Page 17, the breakdown of our adjusted EBITDA. Here, we have a slight increase in the margins in the first half of this year and a slight decrease in the margin in the second quarter of the year. But here, just I would like to point out that we should look here at the half-year numbers, basically because last year.

And this I tried to explain in the last call when we had COVID, we made an additional provision for certain costs in the first quarter of last year that we reversed in the second quarter of last year when we did incur and discussed. So the comparable basis of last year was -- is a bit choppy. That's why it is better to compare quarter -- sorry, half year over half year. But that's basically the reason we had last year in the first quarter, a 2 million real provision for material [Inaudible] that we didn't sense and this provision was reverted in the second quarter.

That's why the comparison base of last year is a bit strange. So if you look at the first semester numbers, there was an expansion of 1.1 points in margin. Cost of services decreased to 28%. Selling EBITDA increasing a little bit, and I'll show you a bit later.

And at the end, we overpassed the 30% adjusted EBITDA threshold this half year. On Page 18, some details here as well. So if you look again at the first-half numbers comparing this year with last year, there was an important reduction in cost of service, so 34% going down to 28%. So the nominal number was virtually flat year over year, and this is through gains of scale.

This is through the implementation of the Flex Courses. This is through general optimizations of personnel as we grow further. So as we grow, we are able to optimize more and more, for example, duration of students per class. We were able to dilute fixed costs.

So this is a clear gain of scale as we go. On the G&A side, on the right, we are more or less stable with 7.5% of revenues at this semester and 6.5% in the quarter. Here, OK, important to highlight that we were not a listed company last year, now we are. So we had some more costs this year.

But going forward, the trend here is to have further gains of scale and a further reduction in the G&A cost as a percentage of net revenue, which, by the way, is very, very lower than the peers. On Page 19, selling expenses and PDA. So a slight increase in selling expenses this year, basically because a big part of the intake last year -- in the cycle of intaking last year, a big part, as you know, was made before the pandemic in January and February. Now the whole intake cycle this year was within a pandemic scenario.

But we had to incur more online media. We and all the peers, we have to incur more on media as with the pandemic, especially now, OK, as the hubs were closed. As you know, the hubs is -- the hubs are important peaks in our selling machine. With the hubs closed, we had to incur more online media.

And doubling in the ENEM also was important to increase the need for more marketing expenses. But on top of that, there is another important factor, which is the important increase in the intaking. We had a very strong intake this year. And also, a very important take last year, which now translates into a slightly higher PDA.

Here on the right, you see that the PDA on a quarterly basis. As a reminder, last year -- in the second half of last year, our intake grew by around 40% compared to the intaking in the second half of '19. So I don't know, the newcomers are -- they represent a big chunk -- the bigger chunk, in fact, of PDA. So now we have this effect in the second half of the year.

On Page 20. Adjusted net income a bit down compared to last year. And here, the most important reason is that we recognized last year for the first time, in the beginning of last year, before tax effects. So the comparable basis here is not clear.

But also, we had an increase in financial expenses this year. Most of our debt is linked to IPC. It's still linked to the acquisition of the UNIASSELVI from Kroton five years ago. So as you know, IPC was much higher than expected in the first half of this year.

On the right, the adjusted cash flow from operations, as I said, very strong, growing a lot this year and with important cash conversion. So we not only show actually nice net revenue and the EBITDA numbers, but also we are focused on generating cash and cash flow. So we generated some 6 million reals of cash flow in the first half of this year or cash flow conversion of around 84%. So on Page 21, just to wrap up, just to thank you all for your time, and to highlight once again that we are very happy with the transaction that we announced with Unicesumar.

So far in the last, I'd say, 20 years, we have been growing a lot purely on organic basis. All of those numbers that I mentioned before, just to remind, are on an organic basis. So the growth in hubs, the growth in intake, the growth in revenues, EBITDA, purely on an organic basis. But we also told you throughout the last year and in the IPO process that we raise funds for M&A and that we were going to look for nice M&A bookings that make sense.

And now with Unicesumar, we found this ideal partner. We share the same culture. We share the same values. We share the purpose of taking high-quality education in the four corners of Brazil.

So we're very proud for that game-changing transaction, clearly a transformational transaction for us and for the sector as a whole. And with, as I said, a very complementary footprint with scale and important value creation through synergies going forward, not only costs but also commercial. So thank you all, and I'll let you open for questions, please.


[Operator instructions] There are no more questions at this time. Presenters, please continue.

Carlos Freitas -- Chief Financial and Investors Relations Officer

Yes. There are questions here from the webcast. The first question from Vitor Tomita from Goldman. First question is, could you give us some more color on Unicesumar can expose you to Law, Nursing, and Psychology courses? And whether that could support the launch and promotion of digital courses in those areas? Very nice question.

Thank you, Vitor. One of the competitive advantages of Unicesumar is that the high quality and the focus they have in health-related courses. They are very known in Paranagua, and they have campuses in Maringa, Londrina, Blumenau. They are very known for high-quality heal courses.

So it is very clear that we will be able to join forces once approved by the authorities, and then a big profit of their knowledge together with our knowledge because we also have courses in Psychology and Nursing and create a very nice product. Our Nursing courses is already being offered, as a said. Their nursing courses will still be offered. But once it is approved, it will be also success for sure.

And for Law, in our case and also in their case, a very important course in on-campus, and we are very confident that once it is allowed to be offered through this location, it's also going to be a success as strong as the one of Nursing. The second question from Vitor is that now that Flex Courses are launched more widely, could you give us some additional color on the commence for Flex, especially in terms of how average ticket compares to your preexisting hybrid courses? Thank you very much. Very important question, Vitor, because there is some confusion around that. The ticket is the same.

There's no differentiation between the Flex Courses and the hybrid course. the -- in the Flex course, you have live -- in-conference live classes with the tutor. That's a dedicated tutor from their region. You have a class, classmates.

You have everything the same. The only difference is that instead of going to the hub, you meet online. So the pricing is the same. There is no price differentiation here for a Flex course.

So it is an opportunity for us to enter into either smaller cities that today -- that do not support a traditional UNIASSELVI hub and/or those courses that do not have a sufficient demand in a given city. So those are the questions. So thank you very much. It was a pleasure, and we are available here, myself, Carol, [Inaudible], and Pedro, to answer further questions going forward.

Thank you.


[Operator signoff]

Duration: 39 minutes

Call participants:

Carlos Freitas -- Chief Financial and Investors Relations Officer

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